Infinity and Beyond

Buying a highflier is an act of faith. Some investors only want to buy inexpensive stocks. Others want to buy the best companies and sell, or short, the worst. The other currently popular, though dubious, method is to buy anything on the expectation that you can get out in time.

Those who buy the best, and are less sensitive to valuation, own
Bed Bath & Beyond.
BBBY 0.04%
The company trades at a nerve-jangling 35 times fiscal 2005 earnings, enough to scare off more conservative investors. But there are potent arguments for why it shouldn't. That isn't to say that valuation doesn't matter. Looking at P/E ratio in a vacuum, however, is misleading. Bed Bath & Beyond has a return on invested capital above 25%, a startlingly high figure.

BB&B has top-notch management and excellent long-term growth prospects, vastly superior to direct competitor Linens 'N Things. The company can expand sales in its stores and the number of stores. One promising strategy is to widen the number of categories the company sells, offering things like health and beauty aids.

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Buyers of the stock expect that sales per square foot, which now stand at roughly $250, will keep expanding, though such growth has been slowing. Retailing-stock investors also generally hail the company's recent acquisition of Christmas Tree Shops, which, despite a misleading name, sells stuff all year round. That chain has an impressive sales per square foot of $400 and could easily grow to 1,200 stores, from its current 500 or so, before saturation.

Investors need to be vigilant for any signs of a weakening consumer. September is coming in weaker than August, which was boosted by tax cuts. Tuesday, the sales surveys of two chain-stores limped in. CarMax said on Monday that September sales were below plan. Most important, Wal-Mart Stores on Monday gave ominous news that despite a good headline about same-store sales, sales spiked on days when people received their weekly salaries. That is behavior that suggests squeezed consumers are living paycheck to paycheck.

At this point, consumer momentum shouldn't be slowing. It may reaccelerate. In any case, investors should look for quality companies to buy.